I. Field of the Invention
The invention is directed to online auctioning systems and methods, and more particularly to an online opportunistic auction system and method for use in commercial secondary markets.
II. General Background of the Invention
When a person or entity borrows money from a lender, the borrower must sign a promissory note promising to repay the home loan and a mortgage note (or deed of trust) to serve as collateral for the loan. The bearer of such notes has a legal claim to the underlying property until the mortgage loan is either paid in full or refinanced. When a lender has distributed all of its available funds, the lender will often raise money by selling groups of notes (mortgage loans) to investors. The selling of mortgage loans to investors is referred to as the secondary mortgage market.
Loans sold on the secondary markets are often bundled and securitized. Securitization is the repackaging of non-negotiable securities into negotiable securities (e.g., issuing securities against future cash flows such as mortgage backed securities). Complete securitization of a financial intermediary""s assets removes the need for deposits as funds that would be recouped when the assets were securitized. In pure form, securities remove default risk and interest rate risk from balance sheets.
For example, mortgage backed securities are created when loans are packaged, or xe2x80x9cpooledxe2x80x9d, by issuers or servicers for sale to investors. As underlying mortgage loans are paid off by homeowners, investors receive payments of interest and principal. Investors may purchase mortgage securities when issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when securities are issued. These issued securities may ultimately be redistributed by dealers in the secondary market. Similarly, asset-backed securities are created when student loans, credit card debt or other forms of consumer or corporate debt are pooled.
Mortgage securities play a crucial role in the availability and cost of housing in the United States. The ability to securitize mortgage loans enables mortgage lenders and mortgage bankers to access a larger reservoir of capital, to make financing available to home buyers at lower costs, and to spread the flow of funds to areas of the country (or other countries) where capital may be scarce.
Buying and selling of mortgage notes takes place on the secondary mortgage market among sophisticated investors such as commercial banks, insurance companies, governmental agencies, savings and loans institutions, Wall Street firms and other high volume mortgagees. Unlike the primary mortgage market, secondary market investors do not necessarily service loans purchased and they do not collect monies owed directly from the borrowers.
Primary lenders such as commercial banks and thrifts generally keep their loans in a portfolio and exploit the secondary market to maintain portfolio liquidity and to accomplish any strategic restructuring. Two operational categories exist: First there are purchasers of portfolios from retail lenders, that create a secondary market with a balance-sheet transfer of loans, passing some related risks from originators to investors. These types of transfers are funded by issued securities. Default risks usually are not passed to the final investors of securities, and are assumed by the facility or retained by originators through recourse purchases. Cash-flow risks are initially absorbed by the facility but may be passed to investors through issuance of pass-through securities. Examples of such portfolio purchasers are Fannie Mae and Freddie Mac. Second, there are lenders that act as liquidity facilities to primary institutions, with loans backed by mortgage portfolios, and funded by issued bonds or borrowed external refinancing lines. The default risk remains with the originator but the facility can offer a variety of loan terms to meet primary lender liquidity and cash-flow needs. On example of such a lender is U.S. Federal Home Loan Banks.
Secondary mortgage market mechanisms typically used to deliver loans can be categorized as xe2x80x9cbulkxe2x80x9d and xe2x80x9cflow deliveryxe2x80x9d arrangements. Bulk deliveries are one-time agreements to deliver a specific group of loans to a purchaser and are offered on the market either directly by the lender or through a loan broker. In non-brokered transactions, the lender sends the loan specifics to each purchaser and receives back bids individually, as the purchasers evaluate the loans. If offered through a broker, the lender delivers the loan information to the broker, who prepares an analysis and advertises the loan to prospective purchasers. The process of compiling up to date loan specifics and advertisements for possible purchasers is typically a time consuming and expensive task. The reliability of pricing information also suffers because mortgage pricing is not static and as such, mechanisms for updated pricing are required.
Loans may also enter the secondary mortgage market as part of a flow deal. Flow deals are contracts spanning a period of time (generally six months) where the lender or broker (collectively xe2x80x9csellerxe2x80x9d) agrees to provide a negotiated minimum amount of loans (typically several million per month). Conventional transaction methods and systems require each lender to apply to sell loans to a number of purchasers, find purchasers willing to buy the loan(s) and negotiate the best possible deal. In situations where there is more than one interested purchaser, the lender can compare different deals. Evaluating multiple possible deals unfortunately is an extremely complex task because there are no standard sets of terms and formulas among purchasers when buying loans. The non-uniformity among purchasers in the secondary market for flow deals currently requires lenders to develop profiles of average loans offered and run the profile against models built for each deal analyzed. Typically, only a few flow deal scenarios are employed resulting in non-optimum mortgage transfers. Furthermore, the actual process is characterized by intense negotiations that may necessitate high commissions to expensive salespersons. The transaction costs for a flow deal using past methods is therefore both time consuming and expensive.
Notwithstanding the high capital volume involved, the secondary mortgage market suffers from many problems associated with the above described transactions. Purchasers must create situation specific contracts for each seller and agree upon delivery mechanisms resulting in a portfolio of non-standard contracts and contract terms requiring individual attention be paid to each loan. Rather than fixed transaction costs regardless of loan size, operating expenses can vary from each transaction and typically increase with transaction volume. Deals are often contingent upon salespeople and their contacts at various lenders and purchasers. Further, there can be a lag of several weeks to months for changes in portfolio and delivery pricing models to be effected. Price changes are often manually handled by technical staff, thus increasing the likelihood of human error and associated auditing costs.
With reference to FIG. 1, the secondary mortgage market involves transactions conducted between entities originating mortgage loans 100, 102, 104 (which may or may not be banks), banks, thrifts (savings and loan associations, saving banks, and credit unions), mortgage companies or similar entities that act as primary lenders 110, 112, 114, mortgage brokers 106, 108 acting as an intermediaries between originators and lending agencies, and secondary purchasers, 122, 124. Commercial banks and thrifts may hold mortgages in their portfolios and also participate in the secondary market as purchasers. In contrast, mortgage banks are rarely mortgage investors: the loans they originate are generally sold to more permanent investors in the secondary market. Typically, originating banks and brokers act as sellers on the secondary market 110, 112, 114 and pool individual loans 116, 118, 120 in a portfolio or bundle for sale to secondary purchasers based on factors such as the geographic location of the asset secured by the loan, the borrowers creditworthiness and the type of loan (30 year fixed mortgage, adjustable interest rate, etc.). Conventionally, pooled loans are then individually sold to secondary purchasers.
A typical life cycle of a loan begins (see FIG. 2) with an origination step where a bank 200, a broker 202, or other lending agency completes a transaction with an individual or entity that results in an asset (usually real property) becoming encumbered by a secured interest from the lending agency. The process by which loans are granted is known as loan origination 204. The mortgage rate that investors will set on loans is dependent on the mortgage rate required by secondary investors who purchase mortgages. Mortgage originators can either (a) hold a new mortgage in their portfolio, (b) sell the mortgage to an investor or conduit in the secondary market, or (c) use the mortgage as collateral for the issuance of a security. As stated above multiple compatible mortgages are then pooled together to form a portfolio or bundle in a process known as portfolio consolidation 206. The seller of the mortgage may then link external dynamic computational models to any one of numerous linked external markets and to individual variables within those markets for their pricing models. Once the pricing model determines an offering price for the mortgage portfolio or bundle, the bundle is offered for sale on the secondary mortgage market 210 with the seller""s purchasing conditions publicized in some manner. If the seller""s purchasing conditions are met by a secondary purchaser""s bid or offer, the loan is transferred to a secondary purchaser 212.
When a mortgage is included in a pool of mortgages acting as collateral for a security, the mortgage is said to be securitized. Investors may then create mortgage-backed securities based on purchased mortgage bundles in whole or in part (known as securitization 214). These type of mortgage-backed securities often traded in secondary markets 216 similar to the secondary mortgage market. In addition, securitization of non-mortgage instruments, such as consumer debt, student loans, corporate leases leads to instruments in the asset-backed securities market 218.
FIG. 3 is an overview of the loan pass through process in secondary markets from the perspective of secondary mortgage purchasers 300, 302 desiring to purchase a specific portfolio (or purchasers in the case of multiple investors) and factors which may affect mortgage purchases in secondary markets. Purchasers often design desired target secondary portfolios 304 that are functions of securitization market demands 306, investor requirements, regulations, actions of other secondary purchasers, and other external factors. Once portfolio requirements are determined, a portfolio purchase offer is submitted to sellers of loans 312, 314. Purchasers have the option to permit bid pooling 310 that allows multiple parties to pool bids cooperatively or independently, to fulfill the criteria of the purchaser""s portfolio bidded upon. Pooling may be done using simultaneous bids or bids may be accumulated until all of the portfolio requirements are met. Similarly, a large portfolio purchase offer may be split or decomposed into smaller offers which can then be individually filled by multiple sellers. Pooled or split bids are then submitted to the purchaser 316 and may be accepted 318 or rejected (bids are iterated 316 until an acceptable bid is received) depending on whether they meet desired target portfolio requirements. Once bids are accepted, a transaction specific transfer contract 320 is negotiated resulting in delivery of the loan bundle and associating compliance tracking 322. In the case of bulk deals, compliance tracking typically entails verification that delivered portfolios are in accordance with the terms of the negotiated secondary purchase. In the case of flow deals, 322 verification of delivery schedules is also required.
Presently, transactions in secondary markets such as the secondary mortgage market are slow and inefficient. As advances in computing have permitted higher levels of automation within various industries, secondary markets have yet to embrace such improvements. Increasing automation levels within traditional secondary markets such as the secondary mortgage market (which includes home equity loans, personal real estate loans, commercial real estate loans), consumer credit (credit cards and direct financing), student loans, automobile leasing, and equipment leasing, can serve to increase accessibility to markets and minimize inefficiencies inherent in these high volume capital intensive markets. The buying and selling of mortgages is currently done in a fragmented and inefficient mannerxe2x80x94often by hand and rarely aided by computer tools. Each seller maintains a list of authorized buyers, uses non-standard contracts and contract terms, and own delivery mechanisms. Buyers and sellers employ large technical staffs to handle delivery formats and price formulas. There is minimal automation, a very limited market of buyers, and inherent inefficiencies in this extremely high volume capital-intensive secondary mortgage market. As illustrated in FIG. 4, the conventional method of conducting secondary market transactions described above requires sellers 400, 402, 404 of bundled mortgages (or other secondary market objects) to individually contact multiple possible secondary purchasers 406, 408, 410, 412 for each desired sale. Primary lenders, 706, 714, can also act as secondary purchasers from other originating entities. Unfortunately, this method of transferring mortgages is time consuming, costly and depends too greatly on human factors as previously described. Separate sales pitches and negotiations need to be transacted between sellers and the plurality of potential buyers.
A key reason why the secondary mortgage market is so fragmented is that it is difficult to qualify sellers. The origination lender (sellers 400, 401, 402) must meet certain qualifying criteria in order to be approved as a seller to a particular investor (the purchaser 406-414). These stringent criteria are designed to help protect investors from fraud. Typically, an investor sends a prospective lender an application, which the lender completes and returns to the investor. The investor then checks the seller""s information against certain internal standards and external sources (such as Dunne and Bradstreet), determines whether the seller qualifies to sell loans to the investor, and if so, how much, what types of loans, etc.
Conventional transaction processes limit the number of potential sellers a particular investor is willing to interact with, and vice versa. Sellers are thus forced to go through the tedious and expensive process of individually qualifying with each potential purchaser. When a seller submits a portfolio for sale to a purchaser, the purchaser first verifies that the seller is qualified to deal, as shown in step 414, 420. In the event the seller is not qualified, the purchaser can either reject the offer 418, 422 or initiate a qualification process 416, 424. This limitation can be quite restrictive to time sensitive transactions or during volatile secondary market activity. Time delays caused by qualifications can immediately impact the price and profitability of deals transacted under those conditions. Often, purchasers are forced to accept sub-optimal price offers due to lack of competitive bids from multiple qualified sellers. In addition, the qualification status needs to be periodically updated and maintained. Under nominal conditions, update period ranges from six months to three years. If however, a seller""s status changes due to an increase in bankruptcies, foreclosures, delinquencies, etc., the previous qualification status is often null and void and needs to be updated.
FIG. 5 amplifies the complexity and unique nature of secondary capital markets and how that impacts the exchange design in a business-to-business e-commerce context. In a person-to-person e-commerce auction business model, the seller and purchaser determine the pricing and utility associated with the auctioned object. There is a visible, predictable and direct relationship to elasticity in demand and supply. Since secondary market is primarily a pass-through conduit, the financial instruments are strongly coupled to external forces. Consequently, transactions and pricing in the secondary market are connected to derivatives in primary origination and securitization markets.
With reference to FIG. 5, secondary markets 504 are necessarily influenced and coupled to primary origination markets 402 and securitization markets 406. Unlike conventional auction transactions, pricing of secondary market objects as disclosed by the invention, is neither purchaser 400 dictated, nor seller 406 dictated, but is dynamically coupled to external markets as will be described below. Depending on types of objects being transferred from seller to purchaser, the secondary market may be coupled to variables such as foreign currency rates, coupon yields, bond yields, treasuries, money supplies, the prime rate, security rates etc. The relationship between pricing a secondary market object to external primary and secondary markets such as the origination market and the securitization markets cannot be extricated because of the co-dependency of the market relationships and dynamic coupling allows for simultaneous trading in multiple markets. (Note that not all features of FIGS. 1-5 are necessarily prior art to the invention).
Accordingly, there is a need to provide increased visibility of loans to the market resulting in a greater number of potential purchasers. There is also a need to allow purchasers and lenders to easily compare contracts against pro-forma or existing loan portfolios to rapidly determine the effects of changing contract terms on loan prices by using advanced models to allow sellers to optimize their deliveries and to allow customers to run proprietary models. There is also a need to permit complete customization of delivery terms, loan purchase contracts and sales contracts. There is also a need for a greater level of pricing accuracy in secondary markets according to existing contracts. Furthermore, there is a need for an automated compliance tracking and longitudinal loan analysis system to enable small parties to contract the delivering and servicing requirements of secondary market transactions to outside parties. There is also a need to allow for parties to employ an automated negotiating agent utilizing a pool of contract terms.
In accordance with one aspect of the invention, an automated exchange system is provided for controlling the exchanging of ownership interests in objects on a secondary market, wherein the objects have a dynamic value affected by time-varying external factors. The automated exchange includes one or more sub-exchanges for maintaining information representative of secondary market transactions and for controlling said transactions. The automated exchange includes one or more of: a secondary portfolio auction sub-exchange; a pricing and valuation services sub-exchange; an electronic contract negotiation services sub-exchange; and a delivery and auditing service sub-exchange.
Optionally, each sub-exchange includes transaction data storage means for storing transaction information representative of the persistent, active and updated state of each of a plurality of transactions controlled by the exchange; auctioning means for auctioning the secondary market objects among subscribers to the exchange based upon the information provided in the transaction datastore; costing means for costing services provided to the subscribers based upon the information provided in the transaction datastore; portfolio encoding means for parameterizing portfolio sale or purchase offers provided by subscribers for storage by the transaction data storage means; and means for identifying transaction opportunities based upon the transaction information maintained by said sub-exchanges. The means for identifying includes logic switch means for selectively controlling information flow among said sub-exchanges based upon said transaction information so as to exploit information maintained in separate sub-exchanges. The auction means includes means for accessing an auto-probes database storing information pertaining to a plurality of conditional alert subscriptions and conditional portfolio purchase/sale offers and means for arbitrating among conflicting conditional alert subscriptions and conditional portfolio purchase/sale offers. The costing means includes means for modeling revenue using subscriber-provided models and means for modeling revenue using exchange-provided models. The transaction data storage means of the invention includes active auto-probe means for communicating said transaction data and dynamic bid state means for storing information pertaining to most recent bids offered by subscribers.
Another aspect of the invention relates to a system for controlling an auction directed to secondary market objects. The system comprises: means for inputting parameters from a participant in the auction identifying an object to be sold, the object being a secondary market object having a dynamic value affected by time-varying external factors; means for inputting parameters representative of the external factors; means for estimating a value of the secondary object based on the external factors; means for selectively providing the estimate of the value to participants in the auction; means for auctioning the object among the participants; means for inputting parameters representative of an object to be purchased from a participant in the auction; and means for determining whether there are any objects offered for sale that conform to the parameters.
Yet another aspect of the invention relates to a system for pricing a secondary market object for a transaction. The system comprises means for inputting parameters from a seller in the transaction identifying an object to be sold, the object being a secondary market object having a dynamic value affected by time-varying external factors; means for inputting parameters representative of the external factors; means for estimating a value of the secondary object based on the external factors; means for selectively providing the estimate of the value to at least one participants in the transaction; means for inputting parameters representative of an object to be purchased from a participant in the auction; and means for determining whether there are any objects offered for sale that conform to the parameters.
Still other aspects of the invention are directed to a method of conducting a transaction to transfer an ownership interest in an object having a dynamic value affected by time-varying external factors in a secondary market object between a seller and at least one buyer comprising the following steps: inputting seller and buyer parameters specific to the object to be sold; estimating the value of the secondary object based on the external factors; selectively providing the estimate of the value of the secondary object to a series of buyers in the transaction so that the buyer may take it into account when placing a bid; receiving bid information from the buyers; determining whether the bid information meets seller transaction criteria based on the dynamically priced object; and finalizing the transaction when the buyers bid information meets seller""s transaction criteria based on the dynamically priced object.
Another feature of the invention relates to a method of notifying a participant on an exchange of a possible business opportunity comprising the steps of: allowing the participant to enter desired portfolio or service information; parameterizing said information; transforming said information into an augmented Gelfand-Naimark-Segal (GNS) construction; inserting the GNS construction into an active auction stream; detecting whether the GNS construction locates a suitable match; and alerting the participant when a suitable match is detected.
Accordingly, in its various embodiments the invention provides increased visibility of loans to the market resulting in a greater number of potential purchasers. It also allows purchasers and lenders to easily compare contracts against pro-forma or existing loan portfolios to rapidly determine the effects of changing contract terms on loan prices by using advanced models to allow sellers to optimize their deliveries and to allow customers to run proprietary models. The invention also allows complete customization of delivery terms, loan purchase contracts and sales contracts. The invention further fulfills the need for greater levels of pricing accuracy in secondary markets according to existing contracts. Furthermore, the invention employs an automated compliance tracking and longitudinal loan analysis system to enable small parties to contract delivering and servicing requirements of secondary market transactions to outside parties. An automated negotiating agent is also provided allowing parties to employ an automated negotiating agent utilizing a pool of contract terms.
The electronic exchange provides increased visibility of secondary loan products to the potential investors, increased profitability for buyers and sellers, more flexibility and accuracy, and improved tracking of loans. Importantly, the central market area of the exchange for offering and bidding for secondary loans reduces the need for loan servicing brokers, commissioned sales staffs and loan acquisition personnel. The electronic exchange counters the weaknesses in current secondary market mechanisms in several ways including: increasing visibility of loans to the market; increasing lender availability to a broader pool of potential purchasers rather than only being exposed to those submitted by the lender""s direct marketing; by allowing for higher profitability yields; by offering the ability to compare contracts against pro-forma or existing loan portfolios to rapidly determine the effects of changing contract terms on loan prices; by offering the ability to optimize seller deliveries via advanced models; by offering the ability for customers to run their own proprietary models; by offering increased accuracy through complete customization of delivery terms, loan purchase and sale contracts; and by facilitating precise pricing of loans according to terms of contracts on file that ensure accurate compliance tracking and longitudinal analyses of all loans. Specifically, the exchange allows sophisticated buyers and sellers of secondary loans and loan servicing rights to: offer secondary loans for auction in a central electronic exchange; bid for secondary loans in the exchange; negotiate and contract to buy and sell secondary loans manually and by computer; stratify, price, and value complex secondary loan portfolios online, according to proprietary models, participant proprietary models and contract terms; register secondary loan portfolios deliver secondary loans under a bulk or flow contract; and track compliance of loan deliveries with contracts.